Annuity payment scams: what are they and how can they be avoided?

Annuity payment scams are sadly more
common than one might think. In general, the annuities market isn’t
consumer-friendly: according to research from Britain’s Financial Conduct Authority,
80% of those who take out annuities from their standard pension company
provider didn’t receive the most value for money possible. And on illegal scams
specifically, research shows that older people constitute three-tenths of scam
victims – meaning the annuities market can be a key node in the scam network.
And for those who do fall victim, it can a life-changing problem. Some older
people have lost their life savings as a result of buying a scam annuity, while
others have found themselves having to change their life plans or deciding to
work later due to losing a chunk of savings worth thousands.

Luckily, however, there are ways to
cut down on the risk that this kind of investment scam will happen. By
informing and educating each other about the basics of an annuity scam, it’s
possible to learn to pick up on the hallmarks of these criminal enterprises and
report them if an agent approaches someone older and vulnerable. People can
also learn to practice basic financial safety habits, such as always treating
potential deals with a healthy dose of scepticism and ensuring that a trusted
friend or family member is on hand to offer advice. This guide will explain
just what an annuity payment scam is, and what specific steps people can take
to ensure that no financial losses occur.

What is an annuity?

First off, it’s important to be sure that the
full picture is present on what actually constitutes an annuity, as it’s hard
to understand what constitutes a scam of this type until the basics are clear.
An annuity is basically a retirement savings product which can be purchased:
once one is in place, it will pay out an agreed rate for the rest of the
holder’s life. Sometimes, annuities will payout for life no matter how long the
person lives, while sometimes they will only payout for a particular number of
years. On other occasions, annuities will be joint with a partner or spouse –
and sometimes they can get more valuable as time goes on, while sometimes they
will remain stagnant. Whichever one is opted for, it’s worth exploring if the
owner highly values security and the knowledge that they can plan their
finances to a detailed extent as they approach retirement. Some financial
advisors will advise against taking out an annuity, however, as it could well turn
out that the holder would have made more money had they invested elsewhere.

Depending
on the region the holder lives in and the retirement market they’re using, an
annuity scam may look slightly different. In some countries where lump-sum
payouts at a particular age (such as 55) are popular, annuities are quite
common. In places where state-sponsored social provision is common, annuities
may also be less common. But in most markets, people will be able to find an
annuity opportunity if required. It’s worth noting here that annuities are not
necessarily bad, and that in many cases they have proven themselves to be
effective ways to invest in an older person’s future. But they are not right
for everyone – and because they on the face of it offer “security” for those
who take them out, those who might consider taking them out could easily get
fooled.

Why investors get fooled

There are a whole host of reasons why
an investor in an annuity payment scam might experience that sinking feeling
which alerts them to the fraudulent nature of the transaction. The first thing
to note is that falling victim to a scam does not mean that the victim is
stupid, or that they are to blame. Annuity payment scam artists are highly
effective operators who can manipulate even someone who is otherwise highly
intelligent, and they are always the ones to blame for committing crimes.
Annuity payment scams can be sophisticated operations, and sometimes can be the
method of choice by those involved in organised crime.

The rise of the Internet and the
decentralised nature of Internet content has meant that convincing websites and
social media posts which appear to be from legitimate payment providers can be
easily created. And while no annuity scam victim is at fault for what happened,
sometimes it can be made easier if the potential victim has a degree of
financial illiteracy. If a person doesn’t know to check to see whether a
potential annuity provider is licensed by the relevant financial market’s
regulator in their jurisdiction, for example, they may be more at risk.

Who are the likely victims?

By their nature, annuity scams,
unfortunately, affect older people more often than others. This is because
annuities are products purchased by those who have built up significant pension
pots, or who are intending to do so. This matches the broader trend, which
shows that older people tend to be more likely to become victims of all kinds
of scams – not just annuity payments ones. This is often because older people
have less experience of navigating the tricky waters of a scam and may be less
confident (or more desperate for a solution to be in place) due to their advancing
age and the higher risk of health problems.

Some groups of seniors or older people
are particularly vulnerable to an annuity payments scam. Those who are
physically unwell, for example, are often likely to be approached by someone
peddling a scam annuity product. In some reprehensible cases, there have been
incidents of scammers approaching those who have been diagnosed with a terminal
illness and deceiving them into investing into a scheme which will only cash
out many years after their death – and, hence, will never be able to get their
cash. And it is also sadly the case that some scam annuity artists will target
those who experience mental or neurological problems associated with old age
that reduce cognitive function, such as Alzheimer’s disease. In these cases,
the scam artist may find it easier to persuade someone to part with their cash.

What happens during an annuity payment
scam?

The mechanics of an annuity payment
scam tends to follow the below trajectory. An older person or a person who is
planning for retirement will be approached by a scammer posing as a
representative, a financial planner or something similar. This person may come
from an agency, or at least from an organisation purporting to be an agency.
Alternatively, they might claim to be independent, and emphasise that this
means they have a decent fee structure in place or access to the whole annuity
market. Sometimes, the connection might be established through printed or
online marketing materials. According to the Pensions Advisory Service:
“Pension scammers are clever, using flashy websites and marketing materials to
lure you in.”

Once the initial relationship between
the senior and the scammer has been established, the next phase is often to
employ fear tactics. Retirement is such a sensitive and at times worrying
issue, and there are often fears in place which can be preyed upon by
unscrupulous scammers. Take the following example: if a person has a
self-invested pension, they are likely to know for sure how much cash they have
in the bank. They may have a rough idea from a financial advisor of what their
annual cash returns will be. However, if the rate of return is not enough to
cover monthly bills comfortably or to enjoy the finer things in life, they may
be worried that they will deplete so much of the capital that by the time they
turn, say, 75 there will be none left. Or they may worry that the rate of
interest which they currently enjoy on their savings will not last forever –
and they could well be right.

In this example, there is very fertile
ground for the scammer who can start to plant seeds of doubt in the senior’s
head and encourage them to believe that they are going to lose their retirement
cash if they don’t opt for the security of the annuity product. The scammer, of
course, will then use this opportunity to emphasise their own annuity
“product”, and will try to persuade the senior to move their cash into this
particular destination.

However, this is often not enough to
push the fraud over the line, and scammers will use other tricks to help
encourage people. They may, for example, create the illusion of significant
discounts in the event that the target signs up there and then, a trick
sometimes called “bonus fraud”. Or they may use complicated language which
confuses the potential client: by throwing around terms such as “investment
linked” or “maturity amount”, the scammer can quickly build legitimacy and
encourage people to be much more trusting than they actually are.

Frustratingly, several different types
of annuity payment fraud have emerged in recent years – and it’s not nearly as
simply as just looking at the basic model of pressuring older people into
choosing a scam model. Sometimes, even legitimate products can be roped into
annuity scams. Take the example of “churning agents”: this particular subset of
an annuity payments scam sees a client being advised by a scammer to swap their
current legitimate annuity product for a new legitimate one, often on the false
pretence of saving cash or something similar. However, this is usually done by
an unscrupulous agent who stands to benefit financially from the move, as they
will be able to receive commission from the action.

And the same goes for the so-called
“secondary annuity market scam”. This is only a risk if the person involved has
an annuity which can be liquidated and cashed out as a lump sum. Sometimes, a
scam provider will tell the older person that they can only receive the value
of their annuity in a lump sum if they pay part of it in a fee. However, this
could be an opportunistic lie: if an annuity holder’s arrangement with their
provider states clearly that the holder will receive all of the value of the
product without a deduction for fees, any claim to the contrary could well be
fraud.

Some tips to avoid annuity payment fraud

There’s no surefire way to avoid
annuity payment fraud, although there are definitely some tips a person can
follow to reduce the chances of it happening to them to as close to zero as
possible. First off, it’s important to develop a sceptical mindset around any
significant financial transaction. When an annuity payment scam artist
approaches a senior, he or she is likely to exaggerate the offer. In this
particular type of investment scam, the scammer may not emphasise high returns.
Instead, they are likely to emphasise security and try to prey on those
feelings rather than encourage feelings of greed. If a person notices that the
seller of a product is emphasising this or applying pressure, they should know
to either avoid them altogether or at least carry-out lots of due diligence.

Taking time is also a good move. The
Pensions Advisory Service recommends that a person should “never be rushed into
making a decision about your pension. It’s your money and your choice. If an
offer sounds too good to be true, it probably is.” An older person should also
always be sure that they know how to check out a provider. In the UK, most
providers of financial services need to be licensed by the Financial Conduct
Authority (FCA) or a similar organisation. If the older person or a trusted
loved one is able to check the register online, they will be able to check
whether the annuity provider is licensed or not. And if they feature on the FCA
list of “unauthorised firms and individuals”, that’s even more of a reason to
avoid them.

As an older person, maintaining
relationships with friends and family members who can act as discreet sounding
boards for informal financial advice is a great idea. Some annuity product
scammers work on the often true assumption that older people are isolated, and
that they will hence avoid telling anyone about their financial problems or
decisions. By ensuring they stay plugged into their wider world, an older
person can reduce the risk that they will become a victim.

And for those older people who are
experiencing neurological problems and no longer have their full faculties, it
may be up to friends and family to take significant legal steps to avoid their
loved one falling victim to fraud. In these cases, family members may sometimes
seek power of attorney to give them control over the person’s financial affairs
and to act as a gatekeeper – especially if there is evidence that the older
loved one has been vulnerable to scams or similar projects in the past.

The takeaway

Annuities, in general, are legitimate investment products
and can come in a wide variety of formats – fixed income, escalating income,
and more. They are often appealing because they can provide some level of
security at a time when this might be scarce in an older person’s life. A
person should only choose annuities if they are right for them, though – and
they should never be chosen as a result of being pressured into doing so.

Those who fall victim to annuity payment scams tend to be
older people, or those who are suffering from illnesses such as neurological
diseases like dementia. Anyone who is vulnerable and who may have a lower level
of financial literacy than normal can be a victim.

One of the main tactics employed by an annuity payment
scammer is to prey on the victim’s sense of fear, perhaps around death or
illness in later life. The person may be worried that their savings capital
will run out if they don’t purchase the annuity, for example. Investment scams
of this nature can also occur when a victim is pressured into signing up on the
spot as part of a bonus or incentive scheme. And if it’s possible to cash out
an existing annuity and swap it to a new provider, a scammer may try to
encourage a victim to do this in order to unfairly pocket the commission.

There are many ways in which a potential victim can take
steps to reduce the chances of an annuity fraud happening to them. First of
all, they can ensure that they carry out due diligence on any annuity provider
by heading over the website of the relevant regulator such as the Financial
Conduct Authority. In addition, they can ensure that they get the support of
friends and family on side to ensure that someone is always looking out for them
and removing the element of isolation on which some annuity payment scammers
prey. And it’s also important for older people to remind themselves that any
offer which seems too good to be true will most likely be just that and is
hence best avoided.

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